State of Florida Dept. of Revenue v. Diaz (In re Diaz)

Summarized by Paul Avron , Berger Singerman LLP
14 years 7 months ago

Citation:

Case No. 10-14426 (11th Cir. July 27, 2011)

Tag(s):

11th Circuit

Ruling:

The Eleventh Circuit reversed an order of the bankruptcy court which held the FL Dept. of Revenue (FDOR) and VA Dept. of Social Services (VADS) in contempt and awarding damages for alleged violations of the automatic stay and discharge injunction because sovereign immunity shielded them from claims they violated the stay and that they did not violate the discharge injunction by taking collection activities in connection with child support obligations due the debtor’s ex-wife.

Procedural context:

Appeal of District Court'a affirmance of Bankruptcy Court Order holding FL Dept. of revenue and Virginia Dept. of Social Services in contempt of court and finding that they violated the automatic stay and the discharge injunction in place after confirmation of Debtor's Chapter 13 case.

Facts:

Facts: A Virginia court ordered the debtor to pay child support obligations to his ex-wife. After defaulting the court entered a judgment for arrearages in favor of the ex-wife to be made up with regular support payments. Debtor then moved to Florida, but continued to not make payments as ordered. The VADS requested the FDOR’s assistance in collection efforts. A Florida court ordered that an account be established to receive and distribute support payments and a wage deduction order was entered. Subsequently, the debtor filed a chapter 13 bankruptcy case listing the FDOR as a priority unsecured creditor. The debtor objected to the claim the FDOR filed in his case; the FDOR didn’t respond and an order sustaining the objection was entered reducing the claim amount. The debtor then filed an amended chapter 13 plan based upon the lower claim of the FDOR to which no one objected and the plan was confirmed. During the debtor’s case, the FDOR mailed the debtor notices regarding past due child support obligations, and a “Notice to Report to Consumer Reporting Agencies” advising that if the unpaid amounts weren’t satisfied credit agencies would be notified. Later, the FDOR issues a ”Notice of Intent to Suspend Driver’s License” advising that if past due child support obligations were not paid the FDOR was authorized to request that the debtor’s license be suspended. The debtor completed payments required under the plan and received a discharge; however, the discharge provided in part that “[d]ebts that are in the nature of alimony, maintenance, or support” were excluded. Approximately 1.5 years after his chapter 13 case was closed the debtor both the FDOR and the VADS instituted collection activities to recover pre-petition that had been denied through disposition of the FDOR’s claim and post-petition interest that accrued during the debtor’s chapter 13 case. Specifically, the FDOR issues multiple collection letters and caused an income deduction order to be issues and the debtor’s driver’s license to be suspended for almost 2 months, while the VADS sent its own collection letters and caused the U.S. Treasury to intercept the debtor’s 2008 and 2009 tax refunds. The debtor sought entry of an order holding the FDOR and VADS in contempt, finding that they violated the automatic stay and the discharge injunction and awarding damages. The bankruptcy court granted the motion and in so doing rejected the agencies’ sovereign immunity defense and found that they had violated the stay and discharge injunction. The district court affirmed. Ruling: After noting two theories of how the bankruptcy court might have had jurisdiction to entertain the debtor’s stay relief and discharge injunction claims against the FDOR and VADS (litigation waiver and consent by ratification, with a third—congressional abrogation no longer valid after the Supreme Court’s decision in Katz) the Eleventh Circuit held that neither theory failed to provide a basis for such jurisdiction. The Eleventh Circuit agreed with arguments by each of the FDOR and VADS that they could not have violated the discharge injunction because child-support obligations are not dischargeable in a chapter 13 case, and that neither res judicata nor collateral estoppel applied because neither the amount nor the dischargeability of the child-support debt was litigated when the bankruptcy court resolved the debtor’s objection to the FDOR’s proof of claim. In support the Eleventh Circuit cited the Supreme Court’s Espinosa decision wherein it stated that child support debt is “not dischargeable under any circumstances” in a chapter 13 case, found that interest on such debt is also nondischargeable and that disallowance of the FDOR’s claim did not equate to discharge thereof outside of bankruptcy.

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